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EU trade plans will increase protectionism and hinder development

Alexander de Ville

23 August 2012

In June, the European Commission drew attention to the increase in protectionist tendencies worldwide. It claimed that over the previous eight months 123 new trade restrictions had been put in place, an acceleration of 25% compared with the previous period studied. However, the Commission’s own proposed trade reforms, published in January, were overlooked. These will push the EU itself towards further protectionism. They will 'hamper the global economy' and ‘hurt developing countries', according to a recent ODI study.

The flagship change of the reforms is the 'differentiation' between developing countries. The terms of trade will be artificially manipulated through the EU's generalised system of preferences (GSP). This suggests that decisions will be made not on economic grounds but on political ones. The policy will lead to richer developing countries (which still have some of the poorest inhabitants, e. g. India and Vietnam) losing lower-tariff trade concessions.

According to economic theory, all removal of trade barriers is beneficial to the world economy. By increasing trade barriers, through tariff and non-tariff means, domestic consumer costs increase, foreign exporters’ sales decrease and efficiency gains through comparative advantage are prevented. These decisions are therefore political. Arguably they have been put in place to prevent possible rivals from catching up with EU countries. The claim that the imports from middle-income countries will be substituted by those from low-income countries seems dubious at best.

Unsurprisingly, EU import preferences for low income countries are focused around primary commodities. They therefore have lower tariffs for these goods. These skewed incentives have reinforced structural deficiencies towards extractive industries especially in sub-Saharan Africa. The EU reforms have prevented these economies from expanding into value adding industries, slowing their development.

Although the introduction to the proposals suggests using trade to improve development, there is little acknowledgement of the impact of the EU’s Common Agricultural Policy (CAP), which distorts trade and prevents development. The economic subsidy given to farmers distorts world prices and the external tariffs penalise competitive foreign farmers selling products to the EU market. These interventions prevent many developing countries advancing through export- driven growth.

In this context, the EU's moves towards further protectionist measures are a cause for deep concern. The policies threaten to damage developing countries and reduce the efficiency of the global economic system.